Page 221 - Global Political Economy_Understanding The International Economic Order

CHA PTER E IGHT
importance for the efficient use of the world’s scarce resources. True!
But this generalization does not explain or determine which country
will produce what, and nation-states will always be very reluctant to
leave that decision entirely up to the market.

Concept of Human Capital
An especially important modification oftrade theory followed Was-
sily Leontief’s discovery ofthe LeontiefParadox. 18 In his research,
Leontiefdiscovered that the United States had a comparative advan-
tage in exporting labor-intensive goods, especially agricultural prod-
ucts and other commodities. This empirical finding ran counter to the
prediction that the United States as a capital-rich country would have
a comparative advantage in capital-intensive goods. According to the
Stopler-Samuelson theorem, derived from conventional trade theory,
a country will export goods produced by its most abundant factor of
production and import goods made by its least abundant factor. The
paradox or anomaly that Leontieffound in American exports was
eventually resolved by introduction ofthe concepts of“human capi-
tal” and ofeconomies ofscale into both trade theory and the neoclas-
19
sical theory ofeconomic growth. Recognition ofthe importance and
effect of investment in training, education, and know-how in the
United States, and ofthe resulting increase in the skills and productiv-
ity ofAmerican workers, explained the LeontiefParadox. While the
idea ofhuman capital considerably enriched and extended our under-
standing ofinternational trade, it did make the original H-O theory
less rigorous or, as economists would say, less robust.

Rise of Intraindustry Trade
Since the reconstruction ofWestern Europe and the freeing of trade
through successive GATT negotiations, most trade has taken place,
contrary to the H-O theory, between countries with similar factor
endowments; most exports ofindustrialized economies go to other
industrialized countries. Such intraindustry trade entails an econo-
my’s exporting and importing goods in the same economic sectors (as
in exportation of one type ofautomobile and importation ofanother
type). Interindustry trade, on the other hand, entails exporting and
importing goods in very different economic sectors, such as exporting
manufactured goods and importing raw materials. Intraindustry trade

18
Wassily W. Leontief, “Domestic Production and Foreign Trade: The American
Capital Position Reexamined,” Economia Internazionale 7, no. 1 (1954): 3–32.
19
William A. Kerr and Nicholas Perdikis, The Economics of International Business
(London: Chapman and Hall, 1995), 24–26.
208